Exposure of D&Os to Liability for Environmental Damages in Brazil
Published 13 January 2016
Environmental legislation is a key issue in Brazil. Brazil hosts one of the largest biomes in the globe, the Amazon rainforest, as well as other biodiverse ecosystems distributed throughout its vast continental area of 8,500,767 km².
Brazil's ability to protect its environmental habitats has increasingly come under threat from intense economic and demographic growth. The exploitation of the country's natural resources is a large foundation of the Brazilian economy, as most of its GDP relies significantly on mining and agriculture activities.
Directors and officers wanting to conduct business locally in Brazil need to be aware that environmental legislation is strictly enforced in Brazil and there is a severe regime for polluters. Despite this, deforestation rates grew by 215% in 2015 according to Imazon, a local non-government organization that monitors the preservation of the Amazon.
Liability for environmental damage is strict and joint in Brazil pursuant to Law 6.938/81 of the Brazilian Civil Code and Section 225(3) of the Brazilian Federal Constitution. Under this regime, if there is a causal link between the activity and the environmental damage, then any party contributing to the damage within the chain may be found liable for the damage, irrespective of whether that party is directly at fault and notwithstanding that that party may have fully complied with all relevant regulations.
The rationale for this strict regime is a consequence of Brazilian environmental case law; negative consequences should always be borne by whoever profits from the activity. This means that the courts may find that even force majeure and Acts of God do not supersede liability caused by environmental damage.
Law 9.605/98 also provides that it is possible to disregard or lift the corporate veil (the “disregard doctrine”) and hold the directors and officers of the company personally liable for environmental damage. The application of the disregard doctrine in Brazil and the issues that this raises were addressed in our autumn newsletter.
In addition to potential civil liability, environmental damage may also result in criminal and administrative sanctions against companies. Directors and officers will be jointly liable with the corporation for any such criminal/administrative breaches to the extent that it is established that they were personally responsible. Whilst any resultant fines and penalties will not be covered by D&O insurance, the cost of defending the criminal/administrative investigations may fall for insurers.
Given the extensive nature of environmental law in Brazil, and the wide potential exposure of both companies and their directors, the importance of D&O insurance for any company potentially exposed to environmental breaches cannot be overstated. Of course, it might be said that the best advice is to minimize the risks of such claims in the first place by taking all preventative steps possible to avoid harming the environment, however, given the strict liability regime which prevails, such liability is not always preventable nor easily foreseeable.